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The Rise of Alternative Financing: New Options for SME Capital

Traditional small business finance in the form of bank loans declined markedly after the 2008
recession. This provided an opportunity for alternative lenders, willing to challenge traditional
banking practices, to flourish and support the development of UK Small and Medium
businesses.

The growth of alternative lending is driven by two main factors: technological advancements
and regulatory changes.

Technological advancements

Technology in the alternative lending sector has advanced rapidly in recent years. New credit
scoring models have been developed that take into account alternative credit data not
typically found on consumer credit reports, enabling businesses to access funding for
growth.

Additionally, significant progress has been made in enhancing security, proactively
identifying customer needs, and providing faster and easier access to financial products in
the alternative lending space, allowing businesses to execute their business plans more
effectively.

Regulatory changes

Regulatory changes have also played a significant role in the rise of alternative lending. After
the 2008 financial crisis, traditional lenders had to comply with stricter capital requirements
and risk management standards, making it more difficult for them to provide loans to
borrowers.

In contrast, alternative lenders emerged as a viable alternative for borrowers who
were unable to meet the stringent requirements of traditional lenders.

Some examples of alternative finance:

Asset finance - asset finance, funding secured against assets, uses valuable balance sheet
items in your business (such as equipment or inventory) as security for a loan.
Equity crowdfunding – when a group or “crowd” of people invest in an early-stage
private company (not listed on the stock market) in exchange for shares in that
company.
Invoice financing – securing invoice financing against outstanding liabilities (e.g. invoice).
This is handy if you have large exceptional invoices, unpaid projects, or established
clients.
Merchant cash advances – this is a type of business finance ideally suited to small
businesses that accept debit and credit card payments. The lender provides the
company with a loan which is repaid with small percentages of all credit and debit card
payments that the company receives.
Online platforms – an online platform such as Finance Nation can be a great way to
secure a business loan. Finance Nation are specialist in connecting business
owners with tailored funding options. Potential lenders are ranked by likely suitability
and an indication of cost and speed.
Peer-to-peer lending - P2P lending (or "P2P") allows people with investment money
to provide business funding directly to business owners via a P2P platform.
Property finance - If a business is looking to acquire a commercial property, it will
need to compare the market for the best rates. This can be complex, and there are
many different alternative finance products available to help build a property portfolio,
including commercial mortgages and auction finance.
Term loans – finally, the most common type of business loan; the Term Loan.
Unsecured business loans, bridging loans, and cash flow loans are all examples of term loan
products that work in similar ways; the lender and business agree on a fixed amount,
an interest rate, and a repayment period.

For small businesses, alternative finance solutions, like the examples given above, can be a
game-changer, especially when traditional avenues for funding are limited or inaccessible.

Advantages of alternative finance for small and medium-sized businesses

Now let’s look at some of the advantages of alternative finance for Small and medium-sized
businesses.

Accessibility of Funds

Small businesses often struggle to secure loans from traditional banks due to strict lending
criteria, lack of collateral, or an insufficient credit history. Alternative finance options like P2P
lending and crowdfunding provide a more accessible route to capital.

These platforms connect small businesses directly with individual lenders or investors, often with fewer bureaucratic hurdles. For instance, crowdfunding platforms like Kickstarter or Indiegogo
allow businesses to raise funds by appealing directly to the public, showcasing their products
or services and attracting contributions from a wide audience.

Flexibility and Speed

Traditional bank loans can be time-consuming to secure, with lengthy application processes
and extensive paperwork. In contrast, alternative finance methods are typically faster and
more flexible. This streamlined application process often requires far less time-consuming
paperwork and approvals. Alternative lenders, using online platforms can process
applications and disburse funds often within days.

This is particularly beneficial for small businesses that need immediate capital to seize an opportunity or manage cash flow issues. The flexibility of these platforms also means that they can offer more tailored financial products that suit the specific needs of small businesses.

Diverse Funding Options

Alternative finance provides a wide range of funding options that can be customized to fit
different business needs. For example, invoice financing allows businesses to borrow money
against unpaid invoices, providing an immediate cash influx to cover operational costs.

Similarly, asset-based lending lets businesses borrow against assets like inventory,
equipment, or real estate. These options are often unavailable or unattractive through
traditional finance, offering small businesses the ability to choose the right type of funding for
their specific circumstances.

Reduced Reliance on Traditional Banks

By turning to alternative finance, small businesses can reduce their reliance on traditional
banking institutions, which may not always prioritize their needs. This diversification of
funding sources can provide small businesses with greater financial stability, independence
and flexibility.

It also encourages a more competitive financial market, where traditional banks may begin to offer more favourable terms and services to compete with alternative lenders.

Opportunities for Innovation

Crowdfunding platforms, in particular, provide not just financial support but also a way to test
the market and build a customer base.

For instance, a small business can launch a product on a crowdfunding platform, gauge consumer interest, and adjust its strategy based on feedback. This level of direct engagement with potential customers can provide invaluable insights and help businesses refine their products or services before a full-scale launch.

Community and Network Building

Alternative finance options, especially crowdfunding, often involve building a community
around the business. This not only helps in raising capital but also in creating a loyal
customer base.

Backers of a crowdfunding campaign often become the first customers and
brand advocates. This community-driven approach can provide small businesses with a solid
foundation for growth.

Financial Inclusion

Alternative finance is particularly beneficial for underserved communities that have
traditionally been excluded from mainstream financial systems. It offers entrepreneurs from
diverse backgrounds the opportunity to access the funding they need to start and grow their
businesses. This inclusivity can foster greater innovation and economic growth across
different sectors.

The Future of Alternative Lending

Alternative finance can offer small businesses much-needed flexibility, accessibility, and
a variety of funding options. By leveraging these alternative sources of capital, small
businesses can overcome the challenges posed by traditional banking and better position
themselves for long-term success.

The alternative lending industry has experienced significant growth over the past decade,
with Compound Annual Growth Rate projections of up to 20% over the next 5 years.
Increasing competition amongst alternative lenders will drive innovation and better borrowing
options for businesses and will also encourage alternative lenders to offer lower interest
rates and more flexible terms, making alternative lending an even more attractive option for
borrowers.

Finance Nation

If you want to dive straight into exploring financing options, you're already in the right place.

Finance Nation is a finance broker that understands the challenges faced by business owners seeking the most time and cost-effective solutions, and we're here to help.

With our cutting-edge Fintech platform, we ensure seamless access to tailored solutions that suit your needs.

With access to lending products you might not find elsewhere, we'll identify the best deals for you and keep things moving until the funds are where they need to be.